Regional development bank could boost agricultural super investment

27 Jun, 2017 05:34 PM
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A RURAL and regional development bank – that would act independent of government to avoid politicisation and help hold the big four banks to account on farm lending - has been recommended in a new report aimed at stimulating debate about the lack of agricultural investment in local superannuation funds.

Industry Super Australia’s discussion paper, “Driving Super Fund Investment in Agriculture” was released last week making six core policy suggestions.

It said super funds are actively looking for opportunities to invest in agriculture and agribusiness based on sound, commercial business cases.

But it conservatively estimated that, at the beginning of 2017, industry funds only held about $1.56 billion dollars in farm assets in Australia, or about 0.2 per cent of their funds under management.

“A previous study found that Australian superannuation funds had allocated around 0.3pc of holdings to Australian and international investments,” it said.

“While there is a general consensus that Australian super funds (both for-profit and not-for-profit funds) have tended to under invest in agriculture in Australia generally, this is less true of not-for-profit super funds, especially industry super funds, which have been among the vanguard of investors in this asset class.”

The report said agriculture remained “the last big sector” of the economy that superannuation funds haven’t entered on mass and agricultural investment “certainly poses significant challenges for investment committees in managed funds”.

“We have already seen the sector is not friendly to institutional investors in terms of ease of investing,” it said.

The barriers include: lack of detailed knowledge of the sector by fund trustees, executives, let alone their asset managers; few asset managers with good long term record in the sector; and performance data either does not exist or is not comparable through time for decision makers.

It also cited difficulty achieving meaningful investment scale ($100m plus) and operational size for corporate farms with many operations being “too fragmented and too small”.

“History suggests that from a fund manager’s perspective the success or failure of agricultural investments turns on choices of business strategy and farm management model,” it said.

“In making these decisions institutional investors need to be cognizant of their own limitations to adequately operate or oversight agricultural investments, including lessons learned from previous failures.”

The rural and regional development bank was a suggested policy solution in the report, to provide advisory services to rural producers and arrange long term finance to “more efficiently intensify their operations”, extending on the concept of a publicly owned and operated Rural Investment Corporation (RIC), funded in this year’s federal budget.

The RIC has been championed by Agriculture and Water Resources Minister Barnaby Joyce and the government is aiming to establish it – to streamline delivery of drought support loans to struggling farmers and water infrastructure loans – in Orange, by 2018.

“A development bank may be a means of delivering government support for fencing, irrigation, renewables, etc. while acting as a counterweight to the Big Four Banks’ market influence and short term perspective,” the report said.

“A panel of suitably qualified independent experts would assess the proposal’s feasibility which, ideally, would operate independently of executive government (to avoid politicisation).

“Ideally the bank would operate independently of government (to avoid politicisation) and mainly draw on institutional funds rather than government.

The report said some “obvious” investor roles were not currently being adequately filled in the market place for agricultural capital.

“There is a role for a rural financier that can operate across entire regions with sufficient expertise to manage projects within and between farms to improve infrastructure overall and provide the right interface to Canberra,” it said of the proposed bank.

The report also said the proposed bank could support smaller to medium sized farming operations that had significant debt levels.

“Often the use of significant debt has been encouraged by the Big Four Banks for reasons that would not pass external scrutiny,” it said.

“Given that these risks are mainly related to smaller farm operations, a specialist advisory capacity could be established to provide these operators with a sounding board to test business decision making.

“The services would be provided on a cost recovery basis but would be entirely independent, motivated only by the interests of the farm operator.

“Such a service would be intended to act as a counterweight to the predatory practices of some existing financial services providers operating in the sector.”

History of rural development banks

The report referred to a 2015 Senate committee report that rejected a Bill introduced by independent SA Senator Nick Xenophon and co-sponsored by former Victorian independent Senator John Madigan to establish a Rural Reconstruction and Development Board within the Reserve Bank.

Its aim was to address spiralling rural debt and market failure in rural lending while independent Queensland MP Bob Katter introduced a similar bill in the House of Representatives.

The proposed bank’s aim was establish a statutory authority providing the long-term capital needs of small to medium enterprises and farming.

“The Xenophon - Madigan proposed development bank was intended to allow tailored funding and financial arrangements to meet the needs of nationally-important industries operating in particularly uncertain or risky environments,” the report said.

“The concept of a rural development bank is not new in Australia.

“The Commonwealth Development Bank (CDB) provided finance to primary production and small industry undertakings where funding was desirable but not obtainable through other means on suitable or reasonable terms.

“The CDB was abolished with the sale of the Commonwealth Bank.

“Yet in its 30 year history, it was credited for helping to establish over 400,000 small to medium sized business enterprises.”

The report said if over time the development bank became an originator of medium-sized and large-sized private equity, infrastructure and property investments, industry super funds would “likely be eager to take equity stakes in these assets, especially once they had a track record of performance”.

“It may also be that super funds would be prepared to take up front ownership stakes in such projects, in circumstances where investment risks in ventures were shared with other project partners, or were otherwise underwritten by the development bank,” it said.

Other policy suggestions included establishing a statistically robust survey of farm performance to independently measure rates of return across various crop and livestock producers and undertaking an infrastructure audit of each of the major commodity supply chains.

It also called for the establishment of appropriate regulatory arrangements to help achieve effective price discovery and transparency in wholesale agricultural markets.

Employing targeted industry and trade policies to incentivise domestic operators to form consortia with local and foreign processors and distribution networks to reduce offtake (agricultural sales) risk and a more strategic approach to foreign investment from the Commonwealth Treasury, were also recommended.

The report also attacked government farm subsidies on the global market, saying it was “debatable” whether they constituted “corruption” of food commodity markets, because the EU, Japan and US openly declared their agricultural sector to be a strategic industry.

“Having either starved or had food restrictions in two world wars, protection of agriculture is a concept welded into the mindset of these nations,” it said.

“Australia has one of the lowest levels of support for farmers in the OECD and emerging nations, except for New Zealand and Vietnam.

“Australian farmers are losing out four ways: they sell onto global markets where their competitors have a 20 per cent on average advantage in state subsidies; they have to sell into their own domestic market, where they have to compete with subsidised imported products; the final price in the domestic market is typically set by the dominant market power of just two supermarkets; and arguably, quarantine levels have been lowered, being regarded as a trade barrier rather than a security measure to guard Australian farmers against imported pests and pathogens.”

FarmWeekly
Colin Bettles

Colin Bettles

is the national political writer for Fairfax Agricultural Media

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